Navigating short sales

Aug 22, 2012

Short sales are becoming more and more common in the Washington area. And experts say they are the most complicated real estate transactions a homeowner can face -- and the most prone to failure.
Brian Gormley, founder of Cornerstone Properties who has handled numerous short sales in the Washington area, was online to take your questions about this complex transaction.

Brian Gormley

Hi! Thanks for joining the chat, and kudos to the Post for sponsoring this forum. I could talk all day about short sales....I'm just hoping my fingers hold up! Let's get to your questions...

I recently put in an offer condo for short sale in Montgomery County. It's been a month (including weekends) now. The seller's bank is Wells Fargo. According to my Realtor, the approval process should be 30 business days. However, according to other articles that I have read on the Wells Fargo process of approval, I have read 37-45 business days. I am willing to be patient throughout this process. But if it takes more than 60 days, I am walking away from this deal.
Question to you. How long is the minimum amount of days for short sale approval process through Wells Fargo in the DC metro?

A: Brian Gormley

Unfortunately it is not that easy. There is no firm number of days, as a deal can get tripped up at any point through the process for missing documents, mortgage insurer review, second lien issues, etc.

Wells is not too bad in terms of processing, although they can be fairly anal with the documents. I would say 60 days is reasonable for purposes of getting at least a counter offer/response.

What can a buyer do (or a buyer's agent) to get more info from the seller's bank. I'm told that no one on our side can contact them; what is our recourse (especially when the seller's agent doesn't seem to aggressive.)

A: Brian Gormley

unfortunately you don't have a lot of recourse, other than being pesky, asking for updates and threatening to move on. sometimes buyers will push a negotiator for the SS as part of their offer package.

Good Day,
I am doing a short sale from a Citi bank owned property; the contract was signed in June and just this week they are doing an exterior BPO ( which is new to the process as I understand it). Can you tell me how long Citi short sales usually take and how often are the approvals similar to the contract price or my lenders appraisal?

A: Brian Gormley

A short sale would not involve a bank owned property - otherwise known as an REO. A short sale is pre-foreclosure. The property title transfers during the foreclosure sale process, after which it becomes bank owned. Presumably this is still owned by the homeowner and not the bank.

This is an important distinction for your question. Short sales will take longer than a foreclosure to approve. If it is a short sale, the bank will have to do a valuation (an exterior BPO is one type) of the property and compare that against the buyer's offer. In an REO, the response time is faster, and the list price is what the owner (lender) expects.

Citi is one of the faster short sale lenders, FYI. With the right negotiator, you are looking at 6-8 weeks.

I am in a horrible situation and I haven't been able to get a positive answer from realtors that I've spoken to. My fiance and I currently live in a 450-square-foot condo that I purchased when I was single at the height of the market in 2005. If we sold it now, we would be about $30,000 short, money neither of us have. There are no real financial hardships as we can pay the mortgage, so I was told that I would not be able to qualify for a short sale. But it is a tremendous hardship for us as this space is too small for the two of us to live in, much less a family, which we would like to start soon as we're both already in our 30s. Waiting it out for the market to recover is not an option. Neither is renting as the market rates for rent are well below what the mortgage payment is. We were not able to refinance as we do not have enough equity in the condo and have two loans. Is there any hope for a short sale. If not, if we stop paying and go into foreclosure, can't the banks come after us? What are our options? Is there any hope for us? I just want to move on with my life and this is holding us back. --Hopeless in Bethesda

A: Brian Gormley

I am somewhat optimistic we can offer some hope in Bethesda. I live here too actually, and understand the dynamics of the market. I think the way to go on hardship is relocation. I have pushed that through numerous times successfully.

In terms of your questions - yes, MD is a recourse state, which means the bank can pursue the difference between what they get from foreclosure and what you owe. Short sale still soumds like your best option. Get in touch after this forum (http://capitolshortsale.com) and let's talk specifics.

Are there any guidelines a lender or bank has to follow when going through a short sale? How can the same bank allow you to walk away from your loan even when you are upside in your home and then make another person sign a promissory note paying the bank back the money they owe. Is a promissory note binding? What would happen if you did not honor the promissory note?

A: Brian Gormley

It's all about who OWNS your loan. You may be interfacing with BoA or Wells Fargo, but they just SERVICE your loan. The note owner (or "investor") is the entity that sets the guidelines for what they will/will not take on a short sale.

Yes, a prom note is binding as a legally enforceable contract. They could sue you for nonpayment if they chose, or send the account to a debt collector.

Hint: many people take prom notes in order to get their short sale through and obtain substantial debt forgiveness with no intention of ever paying on them. They can be negotiated down even after the fact.

To whom it may concern or Mr Brian Gormely
My question is where to look for the help for those who have been paying in time and never ever have missed a payment to motgage company and the loan is not backed by Fannie mae, Freedie Mac
bank of America -do they have any plan or refinancing package where they will atleast attempt to help us?
i am currently paying only intrest for the past five years and have ARM will expire next year.The principal has been the same due to Intrest only payment. would like to fix and get the benefits of Low Fixed Rates.
Please comment .
Thanks
Mr Kumar
raizada1950@gmail.com

A: Brian Gormley

If you are underwater and Freddie/Fannie don't own your loan, even if you haven't missed a payment you are out of luck. You have three options:

1. do nothing and continue to pay current rates/terms

2. pay down the loan in order to have enough equity to refi

3. do a short sale

You're caught in the abyss a bit here - unable to refi and not necessarily someone who the banks want to short sale. I would ask yourself what your long term goals are, and then proceed from there.

Hi Brian,
I am 102 days into a contract on a FHA short sale with Wells Fargo. My realtor informed me last week that the file was finally with the FHA. Can you estimate how much longer the process should take from here?

A: Brian Gormley

Ha! TImetable is so hard to predict. Wells is pretty good. FHA was backed up during a lot of hte summer, but has been responding to variances and approval requests in about 1 week or so recently.

Folks need to educate themselves on short sales and the Federal and state income tax liability they face as a result of a short sale. A Chap 7 bankruptcy before the short sale maybe a better idea since Federal income taxes are not dischargeable in a Chap 7. Short sales make real estate agents richer but they may hurt the seller.

A: Brian Gormley

always a good idea to get sound advice. CPA, bankruptcy atty, real estate atty. the good news on the tax front is that 99% of people are exempt under one of the two cancellation of indebtedness exceptions.

I read in an article that depending on the area and time on the market it is not unreasonable to expect a discount off market value of up to 15% on a short sale.
Does this hold true inside the beltway (NoVa)? We are interested in a short sale (listed slightly over $1 million) which has been on the market for more than a year. Based on online research - it is probably listed close to market value (there have been a few price reductions). Is 15% below the estimated market value a reasonable offer?

A: Brian Gormley

complicated question. if you ask the bank, they'll tell you they want 100% of market value, no discounts. maybe even above market!

good negotiators can make deals work for less. typically freddie and fannie will approve deals that NET them 80-85% of their value.

so the owner is trying to sell but won't move? free rent is always a good gig if you can get it. is this pre- or post-settlement? if before, insist on a move out before whatever threshold (appraisal ordered, inspection, etc) with which you feel comfortable. if after, then hope you have some penalty provisions in your post-settlement occupancy agreement!

I am the buyer. The seller says he will refuse to sign and close unless he is permitted to live in the home for 30days after the closing. What are my options?

A: Brian Gormley

most sellers are willing to come off hard lines when faced with the prospect of foreclosure. this to me comes down to trust: do you think the seller will really move out when he says? if so, then insert some severe penalties in the post-occupancy lease agmt and require a very substantial security deposit. as with any negotiation, it's best to try to understand what's motivating the position rather than just heaving grenades over to the other side and hoping for the white flag to go up. maybe there's an alternative that accomplishes the seller's goals without the need for a hold over.

I was in a bidding war over a short sale townhouse in early May and wound up losing. Fortunately for me, a regular sale townhouse literally across from the first place came on the market in early June. I wound up paying a bit more, but I'm already moved in--and staring at the "For Sale" sign still on the one I lost! Crazy times.

Ultimately, the banks aren't absorbing these losses. On whose backs are they being carried? Those of us who pay our mortgages even though out houses aren't worth what they once were? Taxpayers? This whole process seems like a grown up version of a "do over" and doesn't sit well with me. Predatory lending issues aside, if a person can afford her/his mortgage, why shouldn't they pay like the rest of us? By the way, my house is also cramped and I'd love a bigger one, but that just isn't happening right now.

A: Brian Gormley

I have known several folks who did a short sale b/c of the 'cramped' living conditions issue.

Taxpayers are funding much of the loss, as the two biggest mortgage owners (Freddie and Fannie) are under conservatorship. We all lose through other channels as well: our IRA's, stock portfolios etc - we all were invested in these things without realizing it. It's a small world....

Hello Brian , after months of waiting ( Process started 04/13/12 ) I received news from my real estate agent that my offer of $175000 to the original listing price of $189000 was denied and that the bank would accept $193600, well accepted the counter offer and after signing a new contract and a sending new pre approval letter the real estate agent said that she send it to the sellers layers for submition and FHA review, can you tell me with your experience if everything is going to be ok or chances are that they will ask for more money ( house was appraised at 220000 )

A: Brian Gormley

I can give you a very specific answer if I had some clarification. where did the $193k number come from? is the $220k the bank's appraisal or yours? are you 100% sure that the SELLERS' loan is FHA?

FHA requires 88% net of their appraised value. this is net to them, not purchase price. you can get an exception down to 84%.

Good Afternoon Mr. Gormley, We bought a single family home in 2005 in which we got a 5-yr ARM and a second mortgage balloon. The ARM is with BB&T and the balloon is with BoA. We talked with a financial advisor and since we are under by about $150K there was no hope for a refi under the new provisions. It is possible that we may need to move due to job relocation in the next year or so. Is the short sale option the best for us? And why during a refi do they not even consider the second balloon loan?Thank you for your time.

A: Brian Gormley

if you're that far underwater and looking to relocate, a short sale is sounding pretty good. the other option is to rent, but most people find that logistically challenging, if not financially infeasible.

the refi bank is going to look at what you owe and what your property is worth when deciding whether they can help. they may have been trying to subordinate the existing second lien so they could do the deal w/o having to refi the whole indebtedness. obviously you'd have to talk to them to get some clarification.

Is there a good resource to find an experienced short sale buyers agent and/or negotiator with experienced in a specific area (such as Falls Church)?

A: Brian Gormley

word of mouth is usually as good as anything. you can ask local attorneys or brokers, but each one will likely have their personal favorite, not based on anything particularly objective. the website shortsalesuperstars is a good resource generally. the reality is though that short sales are pretty universal - in that MD doesn't differ a whole lot from NoVA from DC from PA.

Sorry for the double message , The 193600 price came back from the negotiator , the 220000 was the banks appraisal and no aI'm not sure if the sellers loan is an FHA but thatâs what my realtor told me ?

A: Brian Gormley

you can find out if it is FHA by asking if the seller received an Approval to Participate. if they did, the bank's appraised value is on there, along with the net they need (at the 88% threshold).

The story sounds pretty inconsistent - not sure why an FHA negotiator would tell you anything other than appraised value as a counter. Sounds like it may be conventional. If the nego is countering at $193 and you met it, there's an excellent chance of approval on the file.

Just wanted to add to your response to "Underwater House" looking for help -- also contact a HUD-approved housing counseling agency. I'm a housing counselor, and we take appointments with anybody who is interested in learning more about their options, not just with people facing immediate foreclosure. These HUD-approved housing counseling agencies are have financial support from the government and other community foundations, and are able to offer this counseling at no cost to the homeowner. There is free help from experienced, knowledgable people out there; please do use us!

You can get reviewed for a modification on a home that's not your primary residence under HAMP Tier 2 guidelines, if you're eligible.

A: Brian Gormley

Let me say this about loan mods: they are generally a farce. I have seen so many homeowners dragged through the mud just to have their loan mod denied 10 months after application and two days before the foreclosure sale. A former head loss mitigator I know likens them to pre-collections activity: meaning, a dog and pony show that the bank uses to obtain personal financial information it then uses post-sale to determine collections feasibility. I wish it were different, and I used to do these to help folks out, but the reality is that they banks don't want to do loan mods, and the percentages of redefault (>60%) lend credibility to their posture. Only 1-3% of applicants ever get a permanent loan mod.

I don't mean this to be self-serving, just realistic for people who need to some peace of mind with respect to their house and financial future.

You talk about a relocation exception to getting a short sale approved. What does that entail? Can I get a job offer out of state, get the short sale on my underwater house approved and then decide not to move for the job? How strictly is this policed by the lender?

thanks for chatting folks. any other questions feel free to email or call.

brian@cornerstonepropertieshomeinfo.com

443.739.7993

In This Chat

Brian Gormley

Brian Gormley is a licensed attorney and real estate broker focusing his practice in short sales and foreclosure defense. He has worked in the secondary mortgage market for Freddie Mac, Ginnie Mae and most of the banks on Wall Street, as well as in the affordable housing finance industry. He has helped hundreds of homeowners looking to perform work outs with their mortgage lender over the past ten years.